Question

UUSLUTUU Orange Corp has 1 million shares outstanding, and the stock is currently trading at $10 per share. The company has 5000 coupon bonds outstanding. Each coupon bond has a 11% annual coupon, face value of $1000, will mature in 5 years, and is currently priced at 94% of face value. You have decided to calculate the cost of equity using the SML equation. You have estimated that the niska free rate is 5%, and the expected rate of return on the market portfolio is 10%. You also have estimated that the equity beta of the company is 2.5. Finally, the company faces a tax rate of 50% Using the information given, calculate the cost of capital (WACC) of Orange Corp.

Answer 1

calculations. WACS Cwrsent value of equity current value of desta 2 10,00.000X.10 :-) 100,00,000 $ 5,000 x 1,00 x94:1 4700,000---------- weight of dest=_bobt ) 4200,000_=) 0.3197. weight of equity - equity - 1000.000 = 0.6803 debt tequity 0 147,09000 calculations of the wingsal - ke Rp + ß [Rm-Rf) 25/+2.5 (10-51 - 17.5.2 calculation of cost of debt (icd) - bag is nothing but_xield_to maturity of band _YIM_ coupe..amont + Shekimable value - puncher price - life of bond {aredecimabb value to Plundese price] coupon amont 1,000 x 17 ) [10 assume tue redeemable value - 4000 Duchese orice 1,000x94til 2.940. -YIM.=f10+ [:00-94031 t 1,000+ 9405

YIM 122 970 ------- 41258.7.) after tan cost of debt = _ 12.58% [1-0.30] _(8.81%) WACC - Wexket W x ka -0.6803 X 17.54_+0.319ZX 8:81:7 14.72.2)